How accurate is your actual vs. planned time and costs?
by: Peter Collins
With cost and efficiency dominating the corporate agenda in today’s constrained operating environment, the ability to compare and contrast planned versus actual time and costs provides professional services firms with greater visibility and tighter control of performance in billable markets where time is money.
|The ability to plan effectively is crucial for professional services firms operating in billable markets such as accounting, consultancy and law. But being able to allocate time and cost (of resources) with absolute confidence that financial and project targets will be met is difficult if resource planning tools and timesheet systems are being used in isolation, as they typically are today.
Timesheets provide an accurate view of the hours being billed at the end of each week or month, making it relatively straightforward to calculate the actual cost of resourcing a project and the revenue generated as a result. However, if these calculations are not being compared regularly against the time and resources originally allocated to projects, there is no way to assess whether the firm or its staff is performing as efficiently as it could.
Similarly, without formal reporting mechanisms in place that allow management to regularly compare planned time and cost versus actual, it is almost impossible to assess the accuracy of a firm’s planning. This creates uncertainty in terms of forecasting revenues and impacts on the ability to restructure resources and respond quickly to project peaks and troughs, or provide clients with estimates based on quantified historical performance.
Assessing variance levels
For professional services firms, resource planning means assessing resource requirements in respect of the sales pipeline, but many of the approaches employed currently fall short because there’s a lack of visibility across business units and no way of marrying specific skill sets and business processes to individual project requirements. In addition, spreadsheets or enterprise resource planning (ERP) software do not allow users to flex and rationalise resource allocation to meet moving targets.
Moreover, the ability to plan resource allocation and accurately forecast the required budget and delivery timeline depends largely on a firm’s previous knowledge and experience. Often, they will not have kept historical data from previous projects detailing what happened at the beginning and at the end, while external forces can mean requirements are subject to change right up to the point of execution. As such, it is time sheet data that ultimately provides a ‘reality check’ in the form of actual time billed and thus the cost of the project, which in turn feeds into the final calculation of revenue and margin realised.
Firms that already conduct internal audits to gauge performance will compare forecasted time and costs with actual time and costs recorded within their timesheets. Such analysis allows them to see whether a project delivery performed as expected, with the balance between actual versus planned measured in terms of variance. A negative variance occurs when the actual project costs exceed budgeted costs, whereas a positive variance means the work was performed under budget.
Negative variance results in cost overruns, reduced margin and revenue. That’s not to say that positive variances are necessarily a good thing. For example, a positive variance could provide an indication that there are bad working practices at play. Staff are a professional services firm’s most expensive resource and if they are not engaged on billable client activities, they should be doing something else that is of value to the business. A positive variance might also mean a project could have been completed using more junior resources while still meeting the budget and timelines agreed.
Many professional services firms set a variance threshold of 5 per cent before taking further action. Using an internal audit and analysing variance levels, it is possible for a professional services firm to identify if resources are regularly being over-allocated or regularly re-allocated unexpectedly at short notice. It is often the case that a project manager will over-subscribe resources to a project, meaning that the hours billed are less than those anticipated. Likewise, if a team is regularly showing as fully booked but then subsequently billing half of what is expected, closer analysis of their performance can enable internal management departments to approach the project manager and the team to ask why.
Analysing variance levels between actual versus planned more closely can be very revealing. One firm we know of discovered that although staff were showing almost 100 per cent utilisation each month within its resource planning system, further analysis of the actual hours billed revealed utilisation stood at 80 per cent. Not only was this the very level at which its bonus scheme would be applied, it also emerged that staff had been taking Fridays off, meaning the firm in question was missing out on 20 per cent of its potential revenue.
Of course, such visibility can cut both ways. With better visibility of the project pipeline and variance levels, employees are able to plan their own time more effectively. This can be particularly beneficial when employees are paid on a performance-related basis and therefore need to ensure they are not left on the bench for any significant period of time. They can also use the time that they are on the bench more effectively by attending training courses or putting themselves forward for projects they are particularly interested in. In this way, tracking the performance of resources has a positive influence in terms of motivating staff.
Aside from enabling the firm to maximise billable hours and track performance over time, making this information available to staff provides them with first-hand experience of the planning process and enables them to provide more accurate estimates for similar projects in the future. One firm recently expanded the use of its resource planning to enable its advisors and consultants to feedback regularly to managers on the progress of projects, empowering staff and making the pipeline more manageable and visible.
Staying on track with informed accuracy
By continually enhancing the overall effectiveness of its planning, a firm not only improves its performance but also the service levels provided to clients because deliverables are being met. And the more regularly that forecasts and client expectations are met, the more experience and confidence this builds within the business.
In the current climate of shrinking workforces, profits and budgets, it is essential that staff are deployed efficiently and utilised fully. Reporting on data held within timesheet systems and comparing this with the time and costs allocated within a resource planning tool provides c-level executives with the business intelligence they need to assess performance based on actual versus planned. It also allows them to build up a body of historical data that ensures evidenced-based planning, whereby delivery targets become more accurate, variance levels minimised and revenues and margins maximised.
Furthermore, actual versus planned reports can provide management with better visibility on how current projects are performing down to departmental and even individual level. This allows managers to identify whether a specific department or individual is operating more efficiently and transfer best practice accordingly. They can also be presented to shareholders to prove that utilisation (and thus profit) is being maximised.
At a time when all firms are trying to be leaner, improved visibility is critical. If firms have a clearer picture of project progress against historical baselines, they can be more nimble and responsive in the redeployment of resources to ensure projects stay on track and that they do not fall foul of any peaks and troughs that can occur. The same can be said for sizing the workforce appropriately in respect of the project pipeline and market trends (e.g. which disciplines are in demand). Analysis of actual versus planned can also highlight systemic issues and allow firms to take corrective action, ensuring a process of continual improvement throughout the business.